Must-know supply and demand dynamics driving dry bulk shipping

Why China’s manufacturing PMI is the timeliest dry bulk indicator

By Yanyu Mao
|
Feb 21, 2014 8:00 am EDT

What is manufacturing PMI and why is it important?

Manufacturing PMI, which stands for “purchasing managers’ index,” is a monthly gauge of a country’s economic activity in the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment. The watershed for manufacturing PMI is 50. An index of more than 50 represents expansion of the manufacturing sector, while a reading of below 50 represents a contraction.

Since purchasing managers are on the frontline of production, they’re usually the first to react to any disappointment or surprise. So their confidence in the economy reflects how the economy is doing. Another advantage of manufacturing PMI is that it’s based on a survey instead of data collection, so it comes out exactly at the end of the month in a timely fashion.

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Two sets of China’s manufacturing PMI

For the dry bulk shipping industry, one of the most important indicators to watch is definitely China’s Manufacturing PMI, because most commodities (such as iron ore and coal) are used in manufacturing production. Also, manufacturing is by far the largest economic sector, accounting for nearly 47% of China’s annual GDP. However, investors are sometimes confused about China’s manufacturing PMI, since there are actually two institutions that publish them each month. One is China’s National Bureau of Statistics, and the other is Markit Economics.

The existence of two indexes can make China PMI readings difficult to interpret, because investors may wonder which is more useful. In fact, they’re both relatively reliable, but different investors will make different choices based on their own focuses.

The difference between China’s two PMIs

The PMI published by Chinese government more strongly represents large companies and state-owned enterprises that serve the domestic market than the PMI prepared by Markit Economics. The government-backed survey covers 3,000 companies in 31 industries on 12 topics, including production volume, new orders, export orders, and inventory, and the index is seasonally adjusted.

In contrast, Markit Economics collects data from replies to questionnaires sent to purchasing executives in about 420 manufacturing companies. Markit’s preliminary, or flash, PMI is based on 85% to 90% of responses.

Typical investors in the U.S. might give more weight to the HSBC manufacturing PMI, because it more represents the economy as a whole, while the official PMI is biased toward larger and more state-owned companies. Business conditions at private enterprises may more reflect China’s economy, since those private firms are “market players” that depend much less on state-owned resources.

But investors in the dry bulk shipping industry might regard the official PMI as their first reference, since the largest buyers of commodities are usually China’s big state-owned companies—including many heavy industry companies in steel, electricity, and construction. The official data is more biased towards these companies, and they have a larger influence on dry bulk shipping stocks such as Dryships (DRYS), Diana Shipping (DSX), and Safe Bulker (SB).